J.P. Morgan and General Re-New England Asset Management are refinancing a collateralized loan obligation called KZH-Pondview as part of a move to migrate synthetic market value hybrid deals away from the Chase Secured Loan Trust (CSLT) program. Gen-Re, the manager of KZH wants a more flexible vehicle to manage assets. Once KZH is refinanced, Gen-Re plans to sell a significant portion of the original assets and purchase new loans within a deal called Stonewell CLO I, explained Michael Gerity, a director with Fitch Ratings. Stonewell will be a cash-flow arbitrage deal, underwritten by J.P. Morgan. Officials at Gen Re and J.P. Morgan declined comment.
J.P. Morgan is financing KZH on its books, with the noteholders providing credit protection to the bank through a total rate of return swap, explained Gerity. The deal is one of the CSLT vehicles, but the program is ending because J.P. Morgan wants to remove the loans from its books and migrate to the cash-flow arbitrage capital markets funding, he said. Gerity declined comment on J.P. Morgan's motivation for ending the CSLT program.
One originator familiar with the deal said the move is driven by investors who want to migrate into something more akin to cash-flow mechanics. "The majority of CLOs have a cash-flow rather than market-value orientation," he said. "To some extent cash-flow deals insulate the investor from market price volatility on the underlying portfolio." Last year ING Capital Advisors refinanced the Endurance CLO in a similar scenario (LMW, 2/10/02), and Stanfield Capital Partners refinanced the Hamilton CDO, said the originator. A portfolio manager concurred, noting "the market value tests of the CSLT can force you to sell out of positions. There are even triggers in CSLT that if the overall value of the portfolio falls then it could unwind." A portfolio manager said another deal is also being transferred at the moment, but he declined to identify it.
Stonewell will issue approximately $219 million of notes to refinance the existing KZH structure. The KZH deal, originated in 1998, was around $200 million, but Gen-Re plans to sell down defaulted non-performing loans and reinvest with par loans, Gerity noted. Included in the KZH portfolio are 10 loans of concern with nine totaling $22 million to four obligors currently in bankruptcy proceedings. The KZH assets currently have an average credit quality of single-B. But the target portfolio, once new notes have been issued, will have an average credit rating of BB- to B+. When the new notes are issued CDC IXIS Financial Guaranty will wrap the approximately $140 million Triple-A tranche. The new issuer will merge with KZH and the swaps will be unwound.
Another analyst suggested J.P. Morgan wants all the exposure off its books because, though it is not losing money--the risk of losses is held by investors--the CSLT program is being funded through a commercial paper conduit the bank wishes to discontinue. Furthermore, he countered, this is not part of a wider trend of synthetic deals disappearing. Examples of popular synthetic programs offered by banks include Bank of America's SERVES deal and CLAWS from Bear Stearns, he said.